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Demonetisation impact on Maruti stock overdone

 

Image courtesy: Maruti Suzuki

Image courtesy: Maruti Suzuki

 

  Domestic sales for India's largest car manufacturer continued to be on an upward trajectory growing by 14% year-on-year (1,26,226 units). Even a month-on-month comparison indicates that the volume off-take remained unaffected due to pulling out of old Rs 500 and Rs 1,000 notes. 

 

Among the factors that helped was festive season demand which was robust in September and October and a significant spillover was seen in November as well. Also, analysts point out that there have been deliberate efforts to keep the inventory levels low at dealer end and therefore demonetisation did not impact Maruti Suzuki much. 

Another factor which provides comfort is that Maruti Suzuki caters to a large segment of first-time car buys who generously avail credit facilities to fund their purchases. Finally, as Arun Agarwal of Kotak Securities points out, "Products such as Baleno and Brezza have long waiting period and that gives us comfort that volumes won't dry up as anticipated."

However, he also elaborates that the concern for Maruti Suzuki in the next two-three months would be converting the footfalls to showrooms as firm customer orders. "The challenge, for now, is getting footfalls converted into orders and hence there could be some deferment in purchases for a few months. Though it would be temporary, the pent-up demand will return in FY18," Agarwal cautions. 

As for investors, analysts feel the impact of demonetisation was rather overplayed on Maruti Suzuki's stock and the recent 7% correction should be viewed as a good entry point for the stock. "While weak discretionary spending could affect Maruti's earnings in FY17, investors are more likely to value the stock based on its long-term sustainable earnings growth, implying limited impact on valuations," says Pranoy Kurian of IDBI Capital. 

Analysts at Phillip Capital also have a similar view and recently upgraded their recommendation on Maruti Suzuki from 'neutral' to 'buy'. "Sensitivity analysis suggests that the stock price builds in just a 5% volume over FY16-18, which makes risk-reward highly favourable," the analysts note in their report.